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Markets Get a Chance in the Chesapeake

Alice Kenny

Proving that necessity is indeed the mother of invention, the US states that feed water into the Chesapeake Bay — an expanse of water twice the size of Ireland — have begun to explore the use of market-based mechanisms to protect one of the world's largest watersheds. The Ecosystem Marketplace takes a look at how nutrient trading is being explored in Virginia and Pennsylvania.

Proving that necessity is indeed the mother of invention, the US states that feed water into the Chesapeake Bay — an expanse of water twice the size of Ireland — have begun to explore the use of market-based mechanisms to protect one of the world's largest watersheds. The Ecosystem Marketplace takes a look at how nutrient trading is being explored in Virginia and Pennsylvania. Midway through a ten-year push to rescue the polluted Chesapeake Bay and with little to show for it, government officials recently agreed to give market forces a shot at assisting with the cleanup: Water-quality credits will soon be up for sale in Virginia and Pennsylvania looks set to pay farmers to reduce the amount of pollution reaching its waterways. After noting the success other market-based conservation programs have had in cost-effectively reducing pollutants in smaller waterways (as well as lead and sulfur dioxide in the air), officials began agitating years ago to establish a major water quality trading program along the Chesapeake Bay. Now, with significant pollution still pouring into the Bay and the 2011 deadline staring them down, the state of Virginia finally passed legislation to create a water quality trading program in March, 2005. "This is a substantial piece of legislation," says Roy Hoagland, an executive with the Chesapeake Bay Foundation, a watchdog organization overseeing the cleanup of this 64,000-square-mile watershed, the largest in the world. "It will be a real test to see how viable trading will be in our goals to reduce pollution."

A Troubled Bay

Once famed for its pristine expanse, the Chesapeake Bay became so polluted by runoff from sewers, farms and factories in recent decades that fish could not survive in nearly half its waters. Seeking to address this crisis, President Ronald Reagan committed the nation to restoring the Bay in 1984. But the largely volunteer effort he triggered succeeded only in slowing the Bay's decline since agreements carried no penalty when ignored. Worried, and increasingly fed up with the pace of voluntary action, environmentalists eventually convinced courts to oversee a mandatory cleanup plan. Called Chesapeake 2000, the plan spelled out restoration goals for 2011, including the return of fish and other aquatic life, the clearing of murky waters and the dramatic reduction of measurable pollutants — specifically phosphorus and nitrogen. Reaching these goals, however, has proved cumbersome, partly because of the watershed's size and partly because it involves so many parties. In the Chesapeake, seven big political bodies — Virginia, Maryland, Delaware, Pennsylvania, West Virginia, New York and the District of Columbia — share a watershed twice the size of Ireland. With so many interests involved, change has taken time. After five years of planning, the states have finally drafted water quality standards to quantify the hoped-for success of their future efforts. Meanwhile, the Bay has continued dying as the number of people living within the watershed continues to grow. The region's population skyrocketed by 28 percent from 1979 to 1997, fueling more toilet flushes, larger manure-leaching farms, and new expanses of fertilized lawns. This all forms a toxic cocktail of phosphorus and nitrogen that inevitably finds its way downhill into the Bay. Ironically, algae, unlike most aquatic life, thrive on this nutrient mix and significantly complicate the problem. When algae's vast quantity of blooms die, they fall to the Bay's floor, promoting the growth of bacteria that consume the water's oxygen, literally suffocating the Bay. More than a third of the Chesapeake was ranked a "dead zone" last summer by the Chesapeake Bay Foundation. The water was so starved for oxygen that neither fish nor seafloor grasses could survive. The striped bass population, celebrated as recovered in 1995, dropped again last year by 20 percent. Underwater grasses continued disappearing. Overall, on a scale of A through F, the Bay scored a "D", according to the report card the Foundation released. "We've stemmed the tide of degradation but haven't turned the corner of restoration," explains the Foundation's Hoagland. "Let's put it this way:" he adds, "We're out of intensive care but certainly still in the hospital."

Enter Water Quality Trading

Faced with growing pressure and growing problems, some of the people interested in the health of the Chesapeake have begun to look at trading and market-based mechanisms to restore the Bay's health. Water-quality trading is akin to emissions trading, in that it sets limits (caps) on the amounts of pollution that enters a waterway, and then lets emitters trade amongst themselves to meet these limits. Advocates argue that the system enables small wastewater treatment plants to buy credits from larger sewage dischargers, who sometimes find it easier to limit their emissions. This, they say, allows smaller plants to meet their state permit limits for phosphorus and nitrogen discharges rather than undergoing extensive upgrades. Since such upgrades are typically paid for with public funds that yield minor improvements in water quality, proponents of trading schemes argue that they encourage scarce resources to be applied to upgrades that will make the biggest environmental improvements. "Nutrient trading," writes Paul Faeth, director of the Economics Program at the World Resources Institute, "is more politically acceptable than nutrient taxes, more effective than education and exhortation, and less costly and more sparing of public funds." Economists, like Faeth, have long encouraged states to implement nutrient trading to reduce pollution. In fact, Chesapeake Bay program partners — Virginia, Maryland, Pennsylvania, D.C., the Chesapeake Bay Commission and the federal government — signed a compact endorsing nutrient trading in March 2001. Yet the nutrient trading program signed into law in Virginia represents the first and only statutory framework for trading nutrient loads in the Chesapeake Bay watershed at a state level (small, more localized pilot projects exist in places like Pennsylvania). The law will go into effect on July 1 and trades are expected to begin in January, according to John Kennedy, a program manager within the Virginia Department of Environmental Quality who is helping develop the market. The units of exchange in these trades are cash dollars for pounds of nitrogen and pounds of phosphorus. The value of a pound will be set by the market, but Kennedy says it will likely be related to what it would have cost the plant to install upgraded pollution-ridding equipment. As with most cap-and-trade schemes, the Virginia nutrient trading program will focus on large emitters of pollutants — the so-called "point sources" — rather than the smaller polluters. For this reason, the initial — and majority — of trades are likely to involve wastewater treatment plants and other "point sources" trading amongst each other; sources whose discharges are easy to measure.

Good but not good enough

Nutrient trades between wastewater treatment facilities by themselves, however, will not dramatically lower the nitrogen and phosphorus entering the Bay. In Virginia, for instance, only 33 percent of the nitrogen in the Bay and 24 percent of the Bay's phosphorus comes from treatment plants and other "point sources". The rest of the pollution — in fact the majority of the Bay's nutrients — come from non-point sources such as residential lawns and farms in the form of manure, pesticides, and fertilizers that runoff into rivers and streams. For this reason, the Virginia legislation also provides for trading between point and non-point sources. Some treatment plants have begun experimenting with this option. For example, a technologically advanced plant being built in Loudoun County, Virginia, is investigating the possibility of purchasing and retiring active agricultural land, then turning it back into a forest buffer. For every two pounds of phosphorus or nitrogen that would no longer enter the Bay from the former farmland, the plant could likely expand its pollution limit by one pound, explains Kennedy. Virginia's nutrient trading program is also poised to embrace trading outside its borders. The program already allows for trading with the Blue Plains Wastewater Treatment Plant located in the District of Columbia. The largest plant in the entire watershed, Blue Plains serves populations from D.C., North Virginia and Maryland. "We have a shared resource and a shared responsibility for restoring it," says Kennedy.

Bidding for the Bay

Virginia is not alone in looking for market-based answers to the Chesapeake's environmental problems. Recently, Pennsylvania, which already has a pilot water-quality-trading program along the Conestoga River, announced that it will team up with the United States Department of Agriculture and the financial broker NatSource to run a "reverse auction" aimed at reducing the pollutants that leach into the Bay from farms. The auction, which will give out a total of US $90,000, is designed to get the most bang for each conservation buck. Unlike traditional auctions where buyers bid prices up, farmers will compete against each other to submit plans to reduce the greatest percentages of phosphorus runoff from their farms at the least cost. Those with the lowest bids will be awarded funding. They can choose from a variety of already-established best management practices, such as planting seeds directly into untilled soil to minimize runoff, or adding stream-bank fencing to restrict livestock from wading in the water. A new online tool created by the World Resources Institute will estimate phosphorus-runoff reductions and sort bids. Called NutrientNet, it may be used in the future to link point and non-point nutrient traders. "Everyone is facing the same challenge (of reducing nutrients in the Bay) that we arrive at in different ways," says Scott Van de Mark, spokesperson for the Pennsylvania Environmental Council, an environmental organization that designed and will help administer the auction. "The auction, like trading, is one tool in the tool box."

Toward 2011

According to experts, the issue of reducing pollution from the "non-point sources", from farms and residential lawns, is likely to be one of the most important in determining the long-term health of the Bay. They say that saving the Bay will require money and political will targeted particularly at land use practices and at non-point sources of pollutants. "How many people on your street think when they fertilize their lawn they're contributing to the problem?" asks Suzie Greenhalgh, an economist for the environmental think tank World Resources Institute. It is precisely "because the problem involves all of us," she adds, that "it's not easy to regulate." Cleaning the Bay, nonetheless, has turned the corner, moving from a one-size-fits-all-enforcement approach to a market-based-incentive program that proponents expect will prove cost effective and reliable. "You've got to have some pretty inventive thinking because traditional thought is not getting us where we want to go," observes Kennedy. Given the size, the difficulties, and the complexities of the Chesapeake, it is likely that other creative strategies –beyond Virginia's water quality trading and beyond Pennsylvania's reverse auction—will be needed if the 2011 targets are going to be met. Rejuvenating the Bay will rely on the full toolbox of tools, including active enforcement of the federal Clean Water Act and taxpayer subsidies to help cover the cleanup's cost. "It's possible to get all the goals we want accomplished by 2011," says Hoagland of the Chesapeake Bay Foundation. "The question is whether the political will is there to make it happen. We still have a high mountain to climb." Alice Kenny is a prize-winning science writer and a regular contributor to The New York Times Westchester Section. She can be reached at alkenny@aol.com.

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